Thursday, 16 June 2016

Commodities Options Trading in India

MCX may be allowed to introduce options in 2 metals, while NCDEX could be allowed options in 2 most liquid commodities

The Securities and Exchange Board of India (Sebi) is in talks with leading commodity exchanges about allowing options trading in select commodities.

According to sources, the Multi Commodity Exchange might be allowed to introduce options in two metals, while the National Commodity & Derivatives Exchange (NCDEX) could be permitted options in two commodities from the oil complex.

"There is a vital need in the interest of the Indian economy to deepen the commodity derivatives market to attain the basis objectives of price discovery and provision of a platform for risk mitigation. The structural characteristics of options make them significantly attractive as a tool for price risk management. The Exchange is of the opinion that options could be initially introduced in such agricultural commodities, which are liquid on the exchange platform," said an NCDEX spokesperson.

Sebi's commodity advisory committee will meet this month to consider the criteria for commodities in which options can be permitted. Once the penal firms up the criteria, exchanges would be asked to propose commodities in which options can be permitted.

When permitted, there would be an issue for settling futures and options prices for agri commodities at international prices when they are traded in the evening session. Globally, the Chicago Board of Trade (CBOT), which is part of the CME Group, has the most active edible complex contracts.

NCDEX can tie up with that exchange, but CME Group declined to comment on that.

The NCDEX spokesperson said: "The product design and details are being worked out. It is too premature to comment on any specific details on settlement."

What is an option?

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

Still confused?

The idea behind an option is present in many everyday situations. Say, for example, that you discover a house that you'd love to purchase. Unfortunately, you won't have the cash to buy it for another three months. You talk to the owner and negotiate a deal that gives you an option to buy the house in three months for a price of $200,000. The owner agrees, but for this option, you pay a price of $3,000.